The CBOE Volatility Index, also known as the VIX, is the most famous and widely quoted of all the volatility indices. It measures the market’s expectations of the volatility in the S&P 500 index (SPX) for the next 30 calendar days. Unbeknownst to many (despite my efforts), the VIX also has a lesser known sibling that measures the volatility expectations in the SPX for the next 93 calendar days: VXV.

In addition to the volatility indices, there are also markets for VIX futures; lately these have extended out eight or nine months into the future. Whereas the VIX and VXV evaluate volatility over the full course of a future window, the VIX futures are the market’s best guess at what the VIX will be at various snapshots into the future. [The distinction is not that dissimilar to the snapshot of a balance sheet vs. the flows in an income statement or a cash flow statement in accounting.] For this reason, it is certainly possible that an index which measures volatility over the next 93 calendar days may come up with a different value than a VIX futures product in which market participants attempt to estimate what the VIX will be at a specific point in time some 93 days later.

For the most part, the relationship between the VIX and VXV (which are calculations based on the implied volatility of a strip of SPX options) and the VIX futures (whose values are based on market prices) holds together fairly well.

Lately, however, the volatility index values have been much cheaper than the futures values for comparable time periods. In the graphic below, the VIX futures term structure (or at least the first eight months of it) is represented by the blue line, while the VIX and VXV are the red dots and dotted connecting line resting substantially below the VIX futures values.

Savvy traders may be able to find ways to take advantage of this and some related price discrepancies. Everyone, however, is free to ponder the source of the disconnect between SPX options traders and VIX futures traders.